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Comments of Alaskans for Sustainable Budgets on HJR 23 (March 12, 2018)

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Comments of Alaskans for Sustainable Budgets on HJR 23 (March 12, 2018)

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These are the comments of Alaskans for Sustainable Budgets on HJR 23, "Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund" (the current draft of the proposed amendment is available here: https://goo.gl/oWzsHJ)

These are the comments of Alaskans for Sustainable Budgets on HJR 23, "Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund" (the current draft of the proposed amendment is available here: https://goo.gl/oWzsHJ)

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Comments of Alaskans for Sustainable Budgets on HJR 23 (March 12, 2018)

  1. 1. Comments of Alaskans for Sustainable Budgets On HJR 23 March 12, 2018 This is to provide comments on HJR 23 on behalf of Alaskans for Sustainable Budgets. Established in 2012, Alaskans for Sustainable Budgets is a non-partisan effort working to ensure a sound state fiscal structure and strong economy for this and future Alaska generations. In preparing our comments we have reviewed both the original version of HJR 23 and the proposed (Work Draft) Committee Substitute (CS) published yesterday afternoon. The CS is a substantially watered down version of the original resolution. I. Position We oppose the version reflected in the CS for three reasons: (1) the portion of the draw allocated to the PFD is less than 50% and, in the CS, left entirely uncertain; (2) the draw rate (5% in the original version; 4.75% in the CS) is fixed, which we believe is inappropriate for a Constitutional provision; and (3) in any given year the legislature is permitted to withdraw more than the draw rate. We would support HJR 23 if amended to: (1) provide for a firm PFD (“shall distribute”) equal to 50% of the draw rate; (2) provide for a draw rate equal to the real rate of return realized on the invested assets averaged over the preceding five (or 10) years; (3) provide for neither a minimum nor maximum PFD; and (4) provide for legislative confirmation of members of the Permanent Fund Board. II. Reasons The reasons for our positions follow: PFD allocation: According to two recent studies from the University of Alaska- Anchorage’s Institute of Social and Economic Research (ISER), cutting the PFD has the “largest adverse impact” on the overall economy, and is “by far the costliest to Alaska1 1 ISER, Short-run Economic Impacts of Alaska Fiscal Options (March 2016) at p. A-15.
  2. 2. Comments of Alaskans for Sustainable Budgets On HJR 23 March 12, 2018 families” of all of the various new revenue alternatives they studied. Put another way,2 all of the other new revenue alternatives ISER studied have a lower adverse impact and are less costly for Alaska families than cutting the PFD. No studies have refuted those conclusions. If there is a need for new revenues, the Legislature and Governor should look to those which have a lower adverse impact than cutting the PFD. (We are prepared to support a broad based flat tax). Especially in the midst of a recession, we see no justification3 from a fiscal or economic perspective for weakening the overall Alaska economy and imposing additional costs on Alaska families when lower impact alternatives are available. For the same reason, we believe that the PFD should be certain and based on the “shall be transferred” standard reflected in the original version of HJR 23 instead of the “may be appropriated” standard contained in the CS. Not distributing a full PFD is the same as cutting it in order to raise new revenue. If there is a need for new revenue it should be raised through less economically harmful means. Given its economic role and importance, the PFD -- and the contribution it makes to the overall economy and Alaska families -- should not be left to government whim. Draw rate: Constitutional provisions should be designed to be workable and durable over an extended period and in a large variety of situations. As we have seen with the changes made in the draw rate just between the original version of HJR 23 and the CS, market conditions -- which form the basis for the draw rate -- can change significantly over time. Including a fixed draw rate in the Constitution could become highly problematic as changes in market conditions during future periods lead others -- and should lead Alaska -- to adopt significantly higher or lower levels. The establishment of a draw rate usually is based on the “real” rate of return expected4 to be achieved over time. Rather than setting the best current guess in concrete in the Constitution, we recommend instead using as the draw rate for each year the actual, average real rate of return realized over the prior five years (5-year trailing average). As the proposed provision does with market value, using an averaged real rate of return should smooth out any periodic aberrations. If there is a concern that five years is too 2 ISER, How Much Might Closing the State Budget Gap Cost Alaska Families? (Feb. 2017) at p. 1. 3 Alaskans for Sustainable Budgets, Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution (Nov. 2017). 4 The “real” rate of return on an investment is the realized rate of return, less inflation. Investopedia, What is a 'Real Rate Of Return'. 2
  3. 3. Comments of Alaskans for Sustainable Budgets On HJR 23 March 12, 2018 short a period for establishing the real rate of return to be used for purposes of establishing the annual draw rate, we could support instead either the use of a 10-year trailing average, or the use of a 10-year period composed of the past 5 years and the rate projected by the Permanent Fund Board, upon advice of their advisors, for the following five years (which is the basis for the currently proposed 4.75%). No minimum or maximum PFD: While deleted in the CS, the original version contained a minimum PFD of $1,250. We agree with the deletion and believe that both5 the PFD and government shares of the draw (what Governor Hammond referred to as the “other half”) should be set by actual performance, rather than by arbitrary collars. As Alaska transitions to a fiscal and economic structure significantly influenced by Permanent Fund performance, the PFD and government shares should reflect actual rather than artificial results. Basing the PFD and government shares on artificial results resulting from outdated or non-market driven numbers could lead to either bubbles or artificial depressions in the Alaska economy. Limiting the draw: The CS contains a provision which would enable the legislature to withdraw more from the earnings reserve in any given year than provided by the draw rate. We believe that is inappropriate.6 The Permanent Fund is meant for both current and future Alaska generations. Consistent with that principle, once converted to a POMV approach each generation should be permitted to take only its share of revenues determined by that approach. Allowing one generation to take more than its allocated share by taking more from the earnings reserve than results from the draw rate necessarily will come at the expense of future generations. Such intergenerational raids should be prohibited, not enabled, by the Constitution. Requiring confirmation of Permanent Fund Board members: As noted above, Alaska is in the process of transitioning to a fiscal and economic structure that will be significantly influenced by Permanent Fund performance. Just as the Constitution requires legislative confirmation of other positions playing such a role in Alaska government, it should do the same with the Permanent Fund Board. Doing so provides7 an additional check and balance on the quality and knowledge base of those that serve in the role. 5 HJR023A at proposed Art. IX, Sec. 15 (c). 6 CS for House Joint Resolution No. 23 (FIN) (Work Draft) at proposed Art. IX, Sec, 15(e). 7 See, e.g., Art. 3, Section 26. 3

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